Why flight to safety is set to continue

ETF strategist believes healthy fixed-income inflows will be maintained after investors were spooked by December sell-off

Why flight to safety is set to continue

The Canadian ETF fixed-income space will continue to enjoy high inflows after many investors were spooked by the December selloff and comforted by the revised interest-rate outlook.

That’s the view of Mark Noble, Senior Vice President, ETF Strategy at Horizons ETFs, who believes the tables turned in December when the consensus went from fear over rising rates to a situation where people are now more concerned with the global economic situation.

After December’s selloff offered a stark reminder of the volatility facing investors, the landscape would certainly appear to favour fixed income, which was the largest asset gatherer by far last month at $1.4 billion.

Noble said: “Although it wasn’t a great year for fixed income, broad investment grade fixed income rallied in December. But I think what you’re starting to see over the index as a whole is still a flight to safety, so there will probably be more money coming into fixed income.”

Noble believes much of the inflows into the asset class will be towards high investment grade, moving away from high yield and lower grade corporate credit towards safer options as investors adopt a more defensive mindset after the pre-Christmas wake-up call.

It was the worst December for market returns since 1931 and Noble believes it will see many Canadian investors retreat.

He said: “That was an eye-opener for a lot of investors. Canadians by nature – the fact they already have 33% of their portfolio in fixed income – are a defensive lot so you see them definitely getting back into the turtle shell, probably more so in the next year.

“They are naturally going to gravitate towards fixed-income ETFs and probably more so in the next year because ETFs do offer some advantages – the big one is they effectively create a ‘Lit Market’ where it provides transparent pricing and trading as opposed to trading over the counter. You get much more of a real transparent market value and much lower cost in liquid-weighted transact fixed income.”

Investor psychology tends to take over for the retailer in times of turbulence and Canadians’ general reticence to take risk suggests that even if the market rebounds, they will be a little slower to re-enter the market.

Noble said: “It does seem that the interest rate outlook has subsided a bit, so the big headline risk for fixed income and investment grade fixed assets have declined. That said, a lot of money went into non-investment grade fixed income last year and you could see a retreat from that from people getting hurt from credit spreads and instead opting for the higher grade investment fixed income.”

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